Policy Expectations and Policy Evaluations – Abstract

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Lars E.O. Svensson
Sveriges Riksbank, Stockholm University,

Sveriges Riksbank Economic Review 1/2010, 43-78

The development of the Riksbank’s transparency and communication since its independence in 1999 is reviewed. The Riksbank’s record on the management of market expectations of future policy rates after the publication of policy-rate paths in February 2007 is examined, with a focus on the exceptional deviations of market expectations from published policy-rate paths since April 2009. The possible explanations discussed include differing views of future economic developments, communication challenges associated with very low interest rates and perhaps exaggerated lower-bound problems. The consequences of such large deviations of market expectations may be severe and potentially imply a much more restrictive monetary policy than intended. Whether the Riksbank’s transparency and communication are sufficient for effective accountability and evaluation is assessed, and it is shown that tools are available for the effective real-time evaluation of the Riksbank’s policy. Some conclusions and suggestions for possible improvements in the Riksbank’s transparency and communication are offered.

JEL Classification: E52, E58

Keywords: Management of expectations, forecast targeting, flexible inflation